China: Hot Market Runs Hotter

On the international playing field, China has gotten a bad rap lately. George W. Bush even went to China last month in an attempt to prod Chinese leaders about currency system issues, human rights and the piracy of American copyright material. With issues like WTO compliance, growing oil demands and avian flu, it might seem the simplest solution would be to write off China as a trading partner.

But China is too important to the U.S. — and American farmers — to seek a simplistic solution. With a population of 1.3 billion, China represents a huge chunk of the world's 6.3 billion people, but size isn't all that matters when it comes to agricultural trading partners.

China's trade surplus with the U.S. is likely to hit $200 billion this year, which is a political headache for Bush, according to the Associated Press. Todd Meyer, the U.S. Grains Council senior director in Beijing, says China is the world's largest soybean importer and most analysts expect corn imports to rise to a significant level in the coming years. “Agriculture is one of the areas where the U.S. has an opportunity to run a trade surplus,” Meyer says.

Mike Callahan, senior director of international operations in Asia for the U.S. Grains Council adds that China has strong ties with the U.S. because it has attracted tremendous sums of U.S. venture capital, becoming a huge production base for American companies that produce products for the China market and international export market. “These strong financial ties have brought the U.S. and China together, but also give the Chinese a great deal of leverage in negotiations concerning trade, social, economic, political and security issues,” Callahan says.

In addition, he points out that there are still serious issues that make China a risky and tough place to do business. “On the ag trade front, information flows and quality of market information are continuing problems,” Callahan says. “As an example, stock levels of Chinese corn are not well understood and official data are not publicly available. Considered a state secret, this lack of transparency makes it difficult to evaluate and predict what this market will do as an exporter or importer of corn.”

But even though there are unknowns when dealing with China, Callahan says he's optimistic that Chinese demand for corn will far exceed domestic output and that the country will become a major corn importer in the not too distant future.

China is a target as a potential customer of agricultural commodities, not only because of the number of people who live there, but the number of people living in poverty who stand a chance to benefit from the incredible gains of China's economy.

Half of the population of China is still living on $2/day, according to Bob Thompson, Gardner professor of agricultural policy at the University of Illinois.

Revolutionary growth in commodity imports has been powered by China's ability to lift so many people out of poverty, Thompson says. “Most growth in food consumption occurs among those earning $2-10/day,” he says. “The biggest determinant of demand will be how rapidly China is able to lift the second half of the population out of poverty.”

He notes that the Chinese government is concerned about the widening income gap between the country's coasts and the interior population, and it's making a concerted effort to reach the rural areas where most of the poor live. Thompson expects the country's demand for protein to increase exponentially as the interior catches up with the prosperity of the coastal provinces.

“As China succeeds at narrowing the income gap, the consumption of meat will grow as the result of broad-based economic growth,” he says.

While issues like avian influenza and WTO compliance challenge those in the trade world, Thompson doesn't anticipate those issues will have a long-term affect on China's potential as a trading partner.

While avian influenza is a serious world threat because it could influence consumption of protein, he doesn't think there will be long-term affects from it, either. “People who have eaten meat in the past are likely to find some form of meat to eat. And if they can't eat poultry, those who can afford it will most likely eat pork instead, which could actually result in a net gain in feed consumption.”

Thompson believes China is working hard to comply with demands set forth by the WTO upon its acceptance. “The process might take longer than either the U.S. or Chinese governments would like, but I believe they're on track and moving in the right direction,” he says, adding that the U.S. needs to avoid doing anything to derail China's economic growth or create economic instability.

“People tend to focus on market share and how to increase it, but trade is a powerful stimulator of economic growth,” says Thompson. “If low income countries have the opportunities and wherewithal to buy what we produce efficiently, allowing them to produce something else efficiently, we all win. But there's no bigger potential winner than corn and soybean growers in the U.S.”

Two Farmers' Point Of View

Bob Metz and Bob Dickey are two U.S. farmers who have traveled to China representing their country and their profession. Both note the differences in agriculture between China and the U.S.

Many Chinese growers farm two or three acres of land and raise a few chickens and perhaps a hog or two — growing enough to support their families and to pay the government rent. While their methods are simple — most work is done by hand — yields are generally good and every bit of corn is harvested, says Dickey, who farms near Laurel, NE, and is a delegate to the U.S. Grains Council and a past chairman, a member of the Nebraska Corn Board and a member of the National Corn Growers Association board.

He says that through U.S. checkoff programs, Chinese farmers have learned more efficient farming methods. “It's a win-win,” he says. “Chinese farmers' increased efficiency helps improve their standard of living and U.S. checkoff dollars fund more educational missions that create more demand for our corn and soybeans.”China's economic growth is fueling massive increases in demand for all commodities, Dickey says, adding, “China doesn't have a lot of land it can put into production, so its economic growth creates an opportunity for U.S. farmers.”

Bob Metz of West Browns Valley, SD, says U.S. farmers need to take advantage of increased demand by balancing what they need to do to make a living and growing the quality products their customers demand.

As president of the American Soybean Association, he says that in recent meetings with several trading partners, the consensus is that if all things are nearly equal, most countries prefer doing business with the U.S. because of a legal system that protects all parties in trade transactions.

Metz says China's entry into the WTO has been a learning process. “We have to be patient,” he says. “Our economies are more intertwined every day and we have no choice but to deal with them. We need to respect our differences and bring China into the world family as quickly as possible. Sure China makes mistakes, but so do we. We need to work through it because it's a great opportunity.”

China Quick Facts

Poverty

More than 400 million people were lifted above the $1/day poverty level in the last 20 years.

China is still home to 18% of the world's poor.

About 150 million people in China live on less than $1/day.

China's income inequality has risen from 28% in 1981 to 41% today, according to the Gini index*.

Growth

Real GDP grew stronger than expected: 9.5% in the first half of 2005.

As Asia's fastest growing economy over the past 20 years, China saw a six-fold increase in GDP from 1984 through 2004. (Most in coastal provinces.)

In 1985 the average income in China was $280; in 2005 the average income is $1,290.

Global Economy

China contributed one-third of global economic growth in 2004.

In 2004, China accounted for half of global growth in metals demand, and one-third global growth in oil demand.

Foreign exchange reserves exceed $700 billion (second to Japan), and are growing at about $200 billion/year.

About 40% of China's exports go to the U.S.

Source: World Bank

* The Gini index is an inequality measure that gauges the extent to which the distribution of income (or consumption)among individuals or households within a country deviates from a perfectly equal distribution.